Finance and Constitution Committee

Meeting date: Wednesday, September 12, 2018

Official Report 789KB pdf

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Scottish Fiscal Commission (Forecast Evaluation Report)

The next item is evidence from the Scottish Fiscal Commission on the forecast evaluation report. This session forms part of our 2019-20 pre-budget scrutiny. I welcome to the meeting Dame Susan Rice, the chair of the Scottish Fiscal Commission, Professor Alasdair Smith, commissioner, and John Ireland, the chief executive. Thank you very much for sending us the report and the very useful summary that was with it. Before we move to questions, would Dame Susan Rice like to make any opening remarks?

Convener, thank you very much. Good morning, and once again I thank the committee for inviting us. It feels like just yesterday that we were last here talking to you about our summer forecast. We hope that you have all had a good summer, as we have.

Last Wednesday we published three reports: “Forecast Evaluation Report”, which is an annual report; “Value Added Tax (VAT) Approach to Forecasting”; and “Statement of Data Needs”. Yesterday we also published our first costing to accompany the social security secondary legislation for the best start grant.

I will focus my comments on income tax, the economy forecast and our data needs. We are required by legislation to produce an annual evaluation of our forecasts. This is something that we do anyway because looking back at forecasts and how they performed against outturn data is one of the best ways in which forecasters can improve.

As we state in our report, there are many reasons for differences or errors. Forecasting is not an exact science. That is especially the case when we are dealing with economic statistics that are often revised and with some of the newly devolved taxes, where the tax authorities are still establishing the baselines for receipts. In Scotland, the position is even more dynamic as we observe data and trends often for the first time. Things are still forming here.

We have tried to be fair and self-critical of our work and transparent about the way in which we have evaluated it. We have also compared our own forecast errors with those of similar organisations, notably the Office for Budget Responsibility. We find that, overall, our forecast errors are within the ranges that we would expect, by looking at the track record of others.

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This evaluation was the first opportunity to compare our own forecasts, produced in December last year and May this year, against the economic and fiscal data. The relatively short period since we produced the forecasts means that we are looking only at our in-year forecasts. That means that we are talking about forecasts for the fiscal year 2017-18. Next year we will be able to revisit those forecasts, looking at the track record for the current year, 2018-19, as well.

One exception to this timing, however, is income tax, because the most recent data, released in July, is for the earlier fiscal year of 2016-17; we have all had to keep that difference in mind. You may recall that there is an 18-month lag as a result of self-assessment. This is the first-ever release of Scottish non-savings, non-dividend income tax outturn data; it follows Her Majesty’s Revenue and Customs Scottish taxpayer identification exercise and represents something of a milestone in the devolution story.

When we produced our forecasts in May, the survey of personal incomes was the best available source of information on income tax liabilities in Scotland. The survey is based on a sample of UK administrative records held by HMRC, with postal addresses used to infer who would be a Scottish taxpayer. The most recent version of the survey is for 2015-16. In our income forecast in May, we projected income tax liabilities from the fiscal year 2016-17 through to 2023-24.

Now that we have the new data that were released in July, we can see that our survey-based projection for 2016-17 had a £550 million overestimate of receipts. Our analysis suggests that that is primarily driven by the actual number of higher and additional-rate taxpayers being lower than the survey of personal incomes had suggested. As the numbers date from before any changes were made to Scottish income tax bands and rates, we believe that the differences are driven by data rather than by a behavioural response by taxpayers.

I know that the committee will be concerned about the potential impact of this new information on the Scottish Government’s budget. The new receipts data refer to the fiscal year 2016-17, as I said. That is the baseline year under the fiscal framework; it will change the initial deduction for the block grant adjustment for income tax. Therefore, there should be no direct impact on the budget. We can discuss that more, if the committee would like to do so.

You will see that we have also evaluated our forecasts of the other taxes in our remit, including non-domestic rates, Scottish landfill tax and land and buildings transaction tax. I will not say any more about those at this stage.

Turning next to our economic forecast, the official statistics were revised significantly following our May forecast. Economic growth for the fiscal year 2017-18 was revised up from 0.8 to 1.3 per cent, mainly due to some very large revisions in the estimates of construction activity.

Our May forecast of growth for the year 2017-18 was 0.7 per cent, which now looks too low. At that point we had three quarters of official data, which were quite consistent with each other and suggested only modest growth. While we were aware that revisions to those data were likely, we held the view that the statisticians in the Scottish Government, whose job it is to produce the statistics, were best placed to measure and revise their estimates of economic growth.

While the revised data show stronger growth in the year 2017-18 than was previously thought, the average growth since the beginning of the decade since 2010-11 and beyond has fallen slightly. Our view is that there is no evidence from this revision to suggest that we should change our underlying view of subdued trends in the economy.

I will finish by saying a few words about data more generally. Following its inquiry, the Economy, Energy and Fair Work Committee recommended earlier this year that we publish an annual statement of our data needs. As my comments illustrate, good data are fundamental to good forecasts. On balance, we have seen progress in the provision of data, although more can be done. We are concerned, though, about our access to data from the UK Department for Work and Pensions. We do not currently have an agreed way of obtaining access to the data that we require, and our most recent request for information, public body to public body, was treated as a freedom of information request. Although we received that information just in time for us to be able to examine it, we are placed in an uncertain situation with regard to future data requests.

I hope that that was a helpful overview of our work, which made for a busy as well as a good summer. We are very happy to answer any questions that committee members have. Thank you.

Thank you very much for your opening statement. Can I pick up on the final point that you made, which was about not being able to secure data from the DWP? You said that the DWP treated your request as a freedom of information request. That seems somewhat surprising, given that you were trying to get the data to ensure that we have our own new social security system, and the payments for it, in as secure a position as possible. Have you raised the matter with any other committee in the Scottish Parliament, such as the Social Security Committee, to make sure that it is aware of the quite significant challenge that you have just told us about?

It is and was a significant challenge. It happened in recent weeks, so I do not believe that that committee has met since then. We have, however, been very active in working with our colleagues in the Government and talking directly to others in the DWP, to help them to understand our needs. Our sense is that, like all big agencies, the DWP has more and more work to do and probably not more people to do it, and would prefer to take all requests from Scotland from the Scottish Government. The commission, as you all know, acts independently and we have both a right and a need to request our own data. We have raised this and we are in conversation, but we need to get the matter resolved. We need an agreement—a memorandum of understanding about how we work together—as we have with the other UK and Scottish agencies.

The social security issue is not a primary responsibility for this committee, but this is unlike any other circumstance. I know that departments are busy, but we are talking about a primary requirement for the Scottish Government, the Scottish Parliament and the commission. It is not for me to tell you how to do your work, but I would have thought that a reasonable way forward would be for you to write to this Parliament’s Social Security Committee, to let it know what is going on, and to the Scottish Government, to seek its help in securing an outcome as early as possible. I leave that with you. As I said, it is not a matter for this committee. Forgive me for straying into the area, but you did raise it.

Dame Susan, you explained that HMRC has now published its Scottish income tax outturn data for 2016-17, which are some £550 million below the Scottish Fiscal Commission forecast for 2016-17. You also said that that would have no impact on the budget. For the record, it would be useful for people to understand why the forecast number having changed will have no impact on the budget.

The year 2016-17 is the baseline within the fiscal framework, so that is the base from which we start. We hope that the new data are more accurate and reflective, and as we all incorporate the new data they will give us a new baseline, which will carry forward. Because it is the baseline, it is also the time when the initial block grant adjustment is made, so as one number changes the other number changes, and it nets out without an actual impact on the budget. Is that clear enough?

Yes. It is useful to have that on the record from the beginning.

I refer members to my entry in the register of members’ interests.

Good morning, Dame Susan. I have a couple of questions, starting with one on construction. As you mentioned in your opening statement and in the report, there were significant revisions in construction industry activity, which were caused by problems in measuring that activity. You go on to say in the report that because those problems have by no means settled, we can expect that there might be further changes in that sector. That is symptomatic of a failure more broadly across Parliament to understand, in infrastructure projects and the like, the pipeline of the construction sector. Is your analysis of that sector improving and how might that analysis interact with other parliamentary analysis?

I have been talking, so Alasdair Smith can take this one.

I am not sure that it is helpful to refer to our analysis of the construction sector data. We were aware, as were other forecasters and indeed the Scottish Government statisticians, that there were problems in the construction sector data, which were jumping around so much that it was hard to believe that they were accurate. Although there are some inherent difficulties in counting what is going on in that sector from quarter to quarter, it is really for the Scottish Government statisticians to do the best job that they can of producing the most accurate statistics. What we have seen in this quarter is that, having done that, the statisticians have decided that it is appropriate to have an unusually large revision to bring the statistics into better line with what they think is reality.

We have decided that even though we might have some doubts about the credibility of a set of statistics, it is not really for us to get into the business of second-guessing the Government statisticians and trying to do a job in parallel with them or do their job for them. It is sensible for us to take account of the uncertainties in the data, which indeed we did, in the sense that, in looking at our longer-run projections in our report last December, we decided to smooth the construction industry statistics so that their jumping around did not affect our long-run view. In doing our short-run forecasts we really had no better alternative than to take the statistics that we were given and make our best forecasts on that basis. Obviously we welcome the fact that there are now—hopefully—more reliable statistics. We will be taking those into account in our next forecast.

When you see uncertainties in the statistics, which you cater for in providing your analysis, is there a process where you feed that back to the Government statisticians so that they can improve their statistics in future?

I think that the Government statisticians and everyone concerned with the construction industry statistics knew that there were puzzles about the statistics, if only, as I have said, because they were jumping around in a way that was hard to understand. There was no need for us to tell the Scottish Government statisticians what they already knew.

My second question concerns paragraph 3.39 in the report, in the section on non-domestic rates, and uncertainty about

“the resolution of appeals from revaluations that took place before 2017.”

I have a number of constituency cases in which appeals have been going on for longer than a year. Will you elaborate on your assessment of that uncertainty? Is it about the quantum of appeals or the quantum of results?

I am not sure that we have much to add beyond what is in the report, except that this is an area where the numbers are quite volatile. Things happen at different points in the year and a complicated suite of measures are fed in. It is not just about buoyancy; it is about a number of different things. Even in the old days of the non-statutory fiscal commission, numbers jumped around. They will always move a lot. I am not sure that there is a way to address that. There was a large wind farm where the basis changed, making a £3 million difference. The data are also affected by often a very small number of properties or entities that have a large value. John Ireland, I do not know if you want to add some detail to that.

I think that that is as far as we can go on the nitty-gritty. We work very closely with the Scottish Government statisticians and the assessors who compile the roll. As Dame Susan said, during the course of the year there will be a number of appeals, which we track. We speak to the assessors to get their sense of where things are going. It is a very lumpy sort of process. We try to keep on top of it, but there are limits to what we can do.

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It is worth emphasising that although there are a number of inherently volatile elements in the non-domestic rates total and, as Dame Susan and John Ireland have just said, there is a limit to what we can do to forecast—we just have to accept that those elements are a bit difficult to forecast—the overall total of non-domestic rates is a pretty stable number. We are talking about a bit of volatility on top of a very big number. Numerically it is not a huge forecasting issue.

I have a question about income tax, Dame Susan. Do you remember when, a couple of years ago, HMRC failed to identify about 400,000 Scottish taxpayers? That led to some debate, certainly at this committee and others, about the failure even to identify people who were liable to pay the Scottish rate of income tax. It has now emerged that there was quite a discrepancy between the two data sets, which led to the £500 million below-forecast issue. Who has the real data? How can we know which of the data sets is accurate?

The previous data set took UK-wide data and inferred, by address, that people must be Scottish-rate taxpayers. HMRC has now taken a different and, I suppose, more sophisticated look at who might make up that pool. That is the reason for the change now. It is a one-time change—it is not a number that will flip back next year or the year after. There is a completely different methodology now and HMRC has narrowed down who would be NSND—non-savings, non-dividend—income tax payers in Scotland. Some people will pay other kinds of tax and HMRC has narrowed that down.

The outturn data that is published in July is based on the S code. You will remember that, on your pay-as-you-earn code, you have a little “S”. In a sense that is the definitive data. The issue with the forecast evaluation was the mismatch between a statistical sampling of an earlier approach and that hard data about the S codes.

There is another issue, which is whether all Scottish taxpayers are correctly identified with S codes, but that is separate from the issue that we are talking about here.

How can the public get any sense of comfort about what you are dealing with? I do not envy your task here at all, but how on earth can we get any comfort that what we are dealing with is in any sense reliable? It seems that we are dealing with huge variations from time to time.

I would emphasise what John Ireland said, which is that we are not looking at two competing sources of data that are to be treated equally. Until the new data came from HMRC, we and others were working with data derived from a survey of personal incomes. A survey is just a survey. The data that we now have is HMRC’s classification of taxpayers by S codes and that has a different kind of status.

As John Ireland said, the data may still contain some imperfections, but that is the definitive data. We are not jumping around between one and the other. The new data source is the one that we will be basing our forecasts on from now on. It is the one that the OBR will be using and it is the one that, as Susan Rice said, will underpin the block grant assessment. It is the definitive data source.

So we will not see any of these crazy fluctuations in future.

There will be some.

The introduction of the new data source is a one-off step change in the availability of data. From the perspective of making good forecasts, it is a very welcome one-off change.

One of the reasons for the change in the income tax forecast is that quite a high proportion of income tax revenue comes from higher-rate taxpayers. For various reasons that are set out in our report, the survey of personal incomes is not very good at identifying accurately the number of higher-rate taxpayers in Scotland because, for confidentiality reasons, there has to be a bit of aggregation of higher-rate taxpayers in the survey data. On the other hand, the new source—the HMRC outturn data—identifies the higher-rate taxpayers with S codes. It is a more definitive source.

For the purposes of forecasting income tax revenue, it is particularly important that we have a good handle on the number of higher-rate taxpayers. We now have a much better handle on that.

Representatives of HMRC are coming in front of the committee on 3 October, so we will have a chance to ask them in a bit more detail about how HMRC came to that final outturn data description. There is an interesting issue about the number of addresses identified in the survey process being much greater than the number of actual taxpayers. That is an issue for HMRC to pick up.

To an extent, I can understand how the discrepancies happened, because the survey data that you used was based on a very small sample of just 1 to 2 per cent. Obviously, HMRC has the actual outturn data based on all the data on its system. We have identified that there are nearly 30,000 fewer taxpayers than in the original forecast, and there is a lag until we will get the next HMRC outturn report, which is for 2017-18. In your forecasts later this year, how will you track changes in the number of taxpayers and forecast that?

We will take the outturn data from 2016-17, which gives us a clear handle on the taxpayers at that time, and project that forward. We will readjust our forecasting models so that they use that as a baseline. We will know more early next year when the survey of personal incomes is produced for the same year as the outturn data. We will get an even better handle then. However, for the December forecast, we will be rebasing the forecasts and the number of taxpayers using the outturn data for 2016-17, which should give us a far better and more accurate forecast.

You are going to take the number of taxpayers from the HMRC 2016-17 outturn report and fix that for 2017-18. You are not going to make any adjustments to it.

We will make some adjustments. We will try to project that forward. At the moment, we are working through the details of that. Our tax forecasting model has a detailed demographic split, and we are trying to work through how we will use the relatively limited data that we have from the outturn data, which is just by tax band, and how we will fix that and merge it with our fairly rich demographic modelling.

What would be your basis for making adjustments and changes? Obviously, the issue is sensitive, bearing in mind the discrepancies that there have been in the additional and higher-rate bands.

We will take those numbers and tax bands as a hard piece of data. We now just need to work through the quite intricate details of our modelling, which is broken down by gender and age band, and do our best to calibrate it that way. We will lean heavily on the taxpayer numbers in the outturn data, because that is the hard piece of information that we have. We will give it very high weight.

The SFC forecast of landfill tax revenues had an 8.1 per cent error, with the revenues being £11 million higher than forecast. The error was higher than the OBR’s, which was 5.7 per cent, and the Scottish Government’s error in 2016 of 0.5 per cent. Do you see any need to revise your approach to forecasting landfill tax?

Landfill tax is interesting. It involves considering a combination of how much waste is destined for landfill, with all the programmes encouraging other routes for a lot of waste, and the development of incineration capacity. We look at when we think incinerators will come online, what capacity they will have and so forth. All of the most up-to-date data feeds into our on-going forecasts and we will see where that comes out.

It is an in-year forecast. We had some available data for the first quarter and then we used the seasonal pattern in the previous four quarters to extrapolate that first quarter’s data forward. Exactly as Neil Bibby says, we are going to have a look at that seasonal pattern and make sure that what we are using reflects the distribution between quarters as it currently is rather than as it was in the past. There is a bit of work for us to do there. We recognise that we got the seasonal pattern slightly wrong last year.

On LBTT, there was an overall forecast error of zero but, within that, there was a 5.1 per cent error on residential LBTT and a minus 5.3 per cent error for non-residential LBTT. With that in mind, are you planning to make any revisions to your forecast methodology for LBTT?

That was a similar but slightly different issue. Again, it was an in-year forecast and the principal forecast in residential was driven by the fact that transactions in the lower half of the market were much lower than we had estimated from the data. We are going to have another look at that and ensure that we are on top of that transactions data.

The housing market is trickier to forecast than landfill, in that it is not just about a mechanistic approach of applying a seasonal pattern. We need to look at some things and do a bit more digging on that. Again, the issue is the difficulty of doing an in-year forecast. It is about how we use the data for one quarter and extrapolate that forward.

I know that Angela Constance wanted to raise issues about access to data. I hope that I did not get into some of your territory earlier.

I am interested in the SFC’s difficulties with the Department for Work and Pensions, which I say for the record I find truly shocking, given that, until Social Security Scotland is administering all the Scottish benefits, you will be particularly reliant on the DWP’s data. The convener has covered that point adequately, and I look forward to reading your correspondence on it.

More broadly, I am interested in your experience with other UK Government departments and bodies. Are there examples of the relationship working well that could be replicated with the DWP? On a broader issue, I am aware, as other members will be, that the OBR has the right to access information and data from UK and Scottish bodies, whereas you have the right to access information only from Scottish bodies and not UK bodies. Will you share some of your experiences and reflections on that and any ideas that could rectify matters? I am sure that the committee would be willing to help if we could.

That is a good question, and we appreciate it. Because everything that we are doing is new, the landscape is necessarily evolving. The way that you explained our legal right to access is exactly correct. Things move on and can still move on. For example, with Revenue Scotland, we initially asked for data that it did not necessarily produce and publish, but it now produces and makes public some of the data that we require, so things have moved on. We have worked well with Revenue Scotland, and we have further interest in further developments there. It is not just about the UK and Scotland; it is about all the agencies and all of us learning what to do. Revenue Scotland uses different accounting bases for different numbers, and it would be helpful to have public clarification of that.

On UK bodies, from the beginning, we have had a very good working relationship with the OBR, but it is in a similar business to us, which is different from the other UK bodies. We have a memorandum of understanding with HMRC. Again, that has been a developing relationship and it needs to continue to develop, but we feel that good progress has been made. We are looking to enhance that memorandum of understanding, which reflects what we can expect from each other—what we can request and provide, when that happens and how we interact. It is helpful to have those guidelines laid out.

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We understand from some of the UK agencies that, as I said, they have a lot of requests for information and they may feel that they do not have enough staff. Where we come in the pecking order is an issue. It is up to us to develop relationships. It is not just about a method; it is about working together with other bodies, and we are working hard to do that with all of them. I do not know whether Professor Smith or John Ireland wants to say more on that.

There is no particular cudgel that we can use to get what we need. We need people to fully understand who we are, what we are, that we are independent from the Scottish Government and therefore that we have a right to ask for the data. The fact that we are a public body in our own right needs to be respected.

I fully understand that it is a two-way process, that it depends on relationships and that it is a journey that involves all partners and requires everybody to give and take. I understand that some of the UK departments are very big and have many demands on them. How will you increase the visibility of the commission to ensure that you are a bit higher up the pecking order? Is it just about a series of memorandums and agreements, or should there be something more fundamental, such as a legislative right of access to information, which would diminish the need for layer upon layer of agreement?

With the DWP, we are working at lots of levels, through others and ourselves, to try to escalate the issue and enhance the department’s understanding and responsiveness.

It is helpful to think about the timing of different elements of devolution. As Susan Rice said, our relationship with HMRC has developed in a positive direction. There were things that we needed from HMRC and we developed a memorandum of understanding, as set out in our report. That relationship is currently developing in a way that is very positive for us.

The income tax story started sooner than the devolution of social security. So as not to be too negative, I point out that the DWP is coming to the devolution issues a bit later than HMRC did. It is not unduly surprising that a big UK agency, with its own administrative budget priorities and budget tightness, should be cautious about how it handles devolution, and the initial desire to work entirely through the Scottish Government is an understandable response.

To be positive, we hope that, as the devolution of social security expenditure evolves, the DWP will acquire the kind of understanding of the independence of the commission from the Scottish Government that HMRC has and will develop the kind of understanding of our needs that HMRC is developing.

At this stage, we should not be too negative. There are problems, as the convener has noted. It is sensible to try to work through those and hope that we will get the kind of evolution of relationship that we have had with HMRC.

To respond to the last part of Angela Constance’s question, any interest in legislative agreements would be a matter for conversations between exchequers, in Scotland and the Treasury, so that is beyond us.

I am interested in what you said in your opening statement about forecasts not being an exact science. Our briefing papers note that there were revisions to the estimate of GDP growth in August. That is just one example of revisions to GDP, and it is not unusual that revisions are made.

Given the uncertainties and errors around measuring GDP, and the weak and uncertain link between GDP and the size of the tax base in the short run, are the resources that you devote to forecasting GDP justifiable? Would it be better to focus on the fiscal forecasts?

I would make a couple of different responses to that. Yes, there are inherent uncertainties about forecasting the economy. But the issue that we have had this year, with the construction industry data that we have already discussed, is of an unusual magnitude. This should not be taken as symptomatic of the kind of problem that we are going to face with every one of our forecasts.

Addressing your main question: no, I do not think that the right response would be to step back from attempting to do the best forecast of the economy that we can. The Government needs forecasts of the economy. We are the official forecaster for the Government. It is very hard for Government to make economic policy not just in the tax area, but across a wider range, without access to proper macroeconomic forecasts. Someone has to do it and it is our job to do it. We think that our evaluation report shows that, notwithstanding the challenges, we are doing a good job of it. We are not ready to hoist the white flag and say, “Sorry, this is just too difficult for us to do and you have to find someone else to pick it up”.

There are important links between the economy forecast and the fiscal forecast. At the last meeting with you, we had a long discussion. I recall that virtually the whole of the hearing was devoted to changes in our income tax forecast that, incidentally, now seem like small beer compared with the revision of income taxes that we are talking about today.

That income tax forecast was driven by a change in the economy forecast. In forecasting income taxes and in forecasting VAT, which is a task that is coming onto our agenda now, you need a forecast of the economy, because you are not going to be able to produce good income tax forecasts without having as good a picture as you can have of what is going on in the broader economy.

I will talk around the issue. We have a formal legislative remit to do fiscal forecasting for devolved taxes. We are also now required to forecast assigned revenues, such as from VAT, looking at the cost of benefits, such as the social security benefits, which will come to Scotland. It is also a requirement that we forecast onshore GDP for Scotland. Alasdair Smith has given you good reasons why we would want to do those.

What we try to do is bring a Scotland lens to the examination of those areas, in relation to the economy and other forecasts, and to use Scottish data to determine what is happening here. Our economy is not just a twelfth or whatever the fraction is of the UK’s. The economy forecasts always have revisions and there will be more revisions to this one, but we are still in a better place because of the lens that we bring to it and the fact that we do that work ourselves.

James Kelly asked about tax forecasts. To what extent do the errors associated with the GDP forecasts have knock-on implications for the accuracy of the tax forecasts?

One of the reasons for doing a forecast evaluation on an annual basis is to look back and see the source of errors. Forecasts all have errors. Even in the ones where the numbers match, you can see that, underneath, there are errors in this or that element. We use a constant iterative process. As we learn from how we approach things, decisions that we made in the past or new data that have come in, we bring that to bear on future forecasts. The job is not to let one error just sit there for ever and grow and grow in magnitude. We are constantly adapting.

There is one very significant knock-on implication in the case of income tax. When the two Governments have income tax outturns for the fiscal year 2018-19, there will be a reconciliation of budget allocations that have been made for this year with the income tax and other tax outturns. It is desirable for everybody that those reconciliations, which happen two years down the line, are as small as possible, so that the initial budget allocations that are made to the Scottish Government are as close as possible to the final budget allocation. That is one reason why it is important to have income tax forecasts that are as accurate as possible, because you want those knock-on implications in the reconciliation two years down the line to be as small as possible.

If it seems difficult getting forecasts right on income tax, just wait until we get to assignment of VAT. That is a going to be a really interesting situation, given that there is no definitive information available to make those forecasts on, but never mind that just now.

I want to follow up Emma Harper’s questions about your forecasts for GDP growth. The SFC says quite a lot in its paper around how the 2017-18 figure has been revised upwards, but you have revised downwards the figures for the previous years. There is also mention in your report about the forecast for the period after 2017-18 looking subdued—I think that that is the word that you used. Are you saying, therefore, that 2017-18 is a blip? Are we expecting longer-term GDP growth after 2017-18 to revert to where it was before that, which was below the UK-trend figure, or do we not know?

That is a good question, because it is one that a lot of people might ask. The 2017-18 change primarily related to a different understanding of the construction industry. It affects that point in time; it is for the one year. As Alasdair Smith and, I think, John Ireland explained before, and as the report says, we knew that there was something funny about the construction data, so for 2017-18 we did not know what the new numbers would be but we thought that something might change. For the long-term forecast, a rough explanation is that our colleagues extracted the construction data because we just were not too comfortable with it. They looked at all of the other data, got the trends and averages, and then got some trends and averages from the construction data and merged it all back in—to use a term that was used when we were talking to a colleague yesterday, they stitched that back into all of the other information. The GDP forecast is made up of lots of elements.

For that reason, we can comfortably say that the 2017-18 numbers were, in essence, flattened out in our long-term view, and that the long-term view has not changed much. If anything it is slightly weaker than it was even a few months ago. “Subdued” is not a new word for us; it is one we have been using for a little while.

To be clear, you expect that Scottish economic growth will lag behind UK economic growth.

We have not made our new forecast; this is a forecast evaluation. It is not likely to change our long-run view because the changes in the data over the past three or four years give us a higher growth rate in the last year, but not a higher growth rate overall. It is unlikely, therefore, that, when we come to doing our next forecast in December, that that is going to change our view. As Susan Rice said, all the indications are that we will still have a subdued long-run forecast.

The other point to make in response to your question is that, yes, this past year’s growth rate has been higher than we had anticipated. Is it a blip? We will consider such things properly in our December forecast.

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A one-year growth rate of 1.3 per cent is not an exceptionally high number if you thought that the long-run growth rate was somewhere between 0.5 per cent and 1 per cent. One year’s number of 1.3 per cent is not the kind of number that is going to knock you off a forecast because the long-run forecast is lower than 1.3 per cent but is not way above it. It is not an earth-shattering change.

So we should not get too excited about it?

The stitches are not going to come undone.

That is what we are saying.

At this stage. Wait and see.

Forecasters never get overexcited.

Dame Susan, you said that, if anything, you felt that the forecast going forward would be weaker than it was a few months ago. What led you to say that?

It will only be marginally weaker. As Alasdair Smith just said, we have not reforecast everything but we would ask ourselves the same question that we were just asked about the impact of the change in the 2017-18 number. We have given that some thought. On the basis of our whole methodology, we do not see that impacting very much.

John Ireland might be able to think of something that would cause us to be more conservative in the long term.

It is just a matter of a very small degree, and the remark is based on the fact that, in terms of the revised status since 2010, the growth rates are marginally lower than they were before the revisions.

Figure 1 on page 9 of our summary report illustrates the issue in that the actual number is higher for 2017 than our forecast number but, if you look across the full range, the actuals are below the forecast numbers more of the time than they are above it. That is a slightly long-winded way of saying that the overall economic growth picture on the actuals is just slightly below what it was in the forecast, even though it is higher right at the end of the period.

I thank our colleagues from the Scottish Fiscal Commission for coming along today. That concludes this evidence session. I now suspend the meeting.

10:47 Meeting suspended.  

10:49 On resuming—